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        <li class="layui-this"><i class='fa fa-edit'></i> Incorporation of a C Corp.</li>
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                Howard Blair is a senior tax consultant with the CPA firm, Holland, Newton &amp; Woodbine, LLP. He has written a letter to Larry Fine, CEO of Stages Inc., to explain the tax implications associated with the incorporation of Stages Inc. Stages is a newly formed C corporation, the stock of which is owned 30 percent by Larry Fine, 40 percent by Morgan Fine, and 30 percent by Carl Fine (three brothers). The purpose of the letter to the client is to explain the tax implications associated with the incorporation of Stages Inc.<br>
                &nbsp;<br>
                You have been asked to review the letter to Larry Fine and recommend any needed corrections or modifications. Documentation for the amounts in the letter can be found in the Exhibits tab. To revise the letter, click on each segment of underlined text below and select the needed correction, if any, from the list provided. If the underlined text is already correct in the context of the document, select [Original text] from the list.<br>
                &nbsp;
                <div>
                    <hr>
                    <p style="text-align:center"><br>
                        Holland, Newton &amp; Woodbine, LLP<br>
                        236 Forrest Park Road<br>
                        Newark, NJ 89210</p>
                </div>

                <div>June 16, Year 1</div>
                &nbsp;<br>
                Larry Fine, CEO<br>
                Stages Inc.<br>
                4242 Boardwalk Drive<br>
                Newark, NJ 89210<br>
                &nbsp;<br>
                Dear Larry:<br>
                &nbsp;<br>
                Congratulations to you, Morgan, and Carl on your incorporation of Stages! We have reviewed the details of your plans for formation of a C corporation. Our comments and suggestions are outlined below.<br>
                &nbsp;
                <ol style="margin-left:40px">
                    <li><span class="parent mbg far {if condition='isset($log.1)'}xbg{/if}">{if condition='isset($log.1) && $log.1.topic_v eq 2'}<s>{/if}Larry should recognize taxable income (loss) of $100,000.{if condition='isset($log.1) && $log.1.topic_v eq 2'}</s>{/if}</span>
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                                        <input type="radio" name="topic_t[1]" value="1" {if condition='isset($log.1) && $log.1.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Larry should recognize taxable income (loss) of $100,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[1]" value="2" {if condition='isset($log.1) && $log.1.topic_v eq 2'}checked{/if} title="<em class='span'>Larry should recognize taxable income (loss) of zero.</em>"><br/>
                                        <input type="radio" name="topic_t[1]" value="3" {if condition='isset($log.1) && $log.1.topic_v eq 3'}checked{/if} title="<em class='span'>Larry should recognize taxable income (loss) of $200,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[1]" value="4" {if condition='isset($log.1) && $log.1.topic_v eq 4'}checked{/if} title="<em class='span'>Larry should recognize taxable income (loss) of $300,000.</em>"><br/>
                                        <input type="radio" name="topic_t[1]" value="5" {if condition='isset($log.1) && $log.1.topic_v eq 5'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Larry cannot be determined.</em>"><br/>
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                        </form> This is 1,000 hours at $100 per hour for preliminary work done exclusively by Larry prior to the incorporation. There is no taxable income to Larry for the contribution of cash.</li>
                    <li><span class="parent mbg far {if condition='isset($log.2)'}xbg{/if}">There is no taxable income (loss) to Morgan for his contribution of land.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
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                                        <input type="radio" name="topic_t[2]" value="1" {if condition='isset($log.2) && $log.2.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>There is no taxable income (loss) to Morgan for his contribution of land.</em>" ><br/>
                                        <input type="radio" name="topic_t[2]" value="2" {if condition='isset($log.2) && $log.2.topic_v eq 2'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Morgan is $150,000.</em>"><br/>
                                        <input type="radio" name="topic_t[2]" value="3" {if condition='isset($log.2) && $log.2.topic_v eq 3'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Morgan is $250,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[2]" value="4" {if condition='isset($log.2) && $log.2.topic_v eq 4'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Morgan is $400,000.</em>"><br/>
                                        <input type="radio" name="topic_t[2]" value="5" {if condition='isset($log.2) && $log.2.topic_v eq 5'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Morgan cannot be determined.</em>"><br/>
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                        </form> Even though the fair value of the land is higher than Morgan's basis in the land by $150,000, no taxable income is recognized upon the incorporation.</li>
                    <li><span class="parent mbg far {if condition='isset($log.3)'}xbg{/if}">Carl's taxable income will be zero.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
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                                        <input type="radio" name="topic_t[3]" value="1" {if condition='isset($log.3) && $log.3.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Carl's taxable income will be zero.</em>" ><br/>
                                        <input type="radio" name="topic_t[3]" value="2" {if condition='isset($log.3) && $log.3.topic_v eq 2'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Carl is $150,000.</em>"><br/>
                                        <input type="radio" name="topic_t[3]" value="3" {if condition='isset($log.3) && $log.3.topic_v eq 3'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Carl is $300,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[3]" value="4" {if condition='isset($log.3) && $log.3.topic_v eq 4'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Carl is $450,000.</em>"><br/>
                                        <input type="radio" name="topic_t[3]" value="5" {if condition='isset($log.3) && $log.3.topic_v eq 5'}checked{/if} title="<em class='span'>Taxable income (loss) recognized by Carl cannot be determined.</em>"><br/>
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                        </form> Generally, when a group of shareholders together own more than 80 percent of a corporation, no gain or loss is recognized by shareholders who contribute property to the corporation.</li>
                    <li><span class="parent mbg far {if condition='isset($log.4)'}xbg{/if}">The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation is $200,000.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
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                                        <input type="radio" name="topic_t[4]" value="1" {if condition='isset($log.4) && $log.4.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation is $200,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[4]" value="2" {if condition='isset($log.4) && $log.4.topic_v eq 2'}checked{/if} title="<em class='span'>The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation is zero.</em>"><br/>
                                        <input type="radio" name="topic_t[4]" value="3" {if condition='isset($log.4) && $log.4.topic_v eq 3'}checked{/if} title="<em class='span'>The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation is $100,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[4]" value="4" {if condition='isset($log.4) && $log.4.topic_v eq 4'}checked{/if} title="<em class='span'>The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation is $300,000.</em>"><br/>
                                        <input type="radio" name="topic_t[4]" value="5" {if condition='isset($log.4) && $log.4.topic_v eq 5'}checked{/if} title="<em class='span'>The adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation cannot be determined.</em>"><br/>
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                        </form> The cash contributed by Larry to Stages amounted to $200,000.</li>
                    <li><span class="parent mbg far {if condition='isset($log.5)'}xbg{/if}">The adjusted basis to Morgan of Stages, Inc., stock received by Morgan in the incorporation is $400,000.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
                            <blockquote class="layui-elem-quote layui-quote-nm">
                                <b class="b">Choose an option below:</b><hr>
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                                        <input type="radio" name="topic_t[5]" value="1" {if condition='isset($log.5) && $log.5.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The adjusted basis to Morgan of Stages, Inc., stock received by Morgan in the incorporation is $400,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[5]" value="2" {if condition='isset($log.5) && $log.5.topic_v eq 2'}checked{/if} title="<em class='span'>The adjusted basis to Morgan of Stages Inc. stock received by Morgan in the incorporation is zero.</em>"><br/>
                                        <input type="radio" name="topic_t[5]" value="3" {if condition='isset($log.5) && $log.5.topic_v eq 3'}checked{/if} title="<em class='span'>The adjusted basis to Morgan of Stages Inc. stock received by Morgan in the incorporation is $150,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[5]" value="4" {if condition='isset($log.5) && $log.5.topic_v eq 4'}checked{/if} title="<em class='span'>The adjusted basis to Morgan of Stages Inc. stock received by Morgan in the incorporation is $250,000.</em>"><br/>
                                        <input type="radio" name="topic_t[5]" value="5" {if condition='isset($log.5) && $log.5.topic_v eq 5'}checked{/if} title="<em class='span'>The adjusted basis to Morgan of Stages Inc. stock received by Morgan in the incorporation cannot be determined.</em>"><br/>
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                        </form> The fair value of the land contributed by Morgan to Stages is $400,000.</li>
                    <li><span class="parent mbg far {if condition='isset($log.6)'}xbg{/if}">The adjusted basis to Carl of Stages Inc., stock received by Carl in the incorporation is $150,000.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
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                                        <input type="radio" name="topic_t[6]" value="1" {if condition='isset($log.6) && $log.6.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The adjusted basis to Carl of Stages Inc., stock received by Carl in the incorporation is $150,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[6]" value="2" {if condition='isset($log.6) && $log.6.topic_v eq 2'}checked{/if} title="<em class='span'>The adjusted basis to Carl of Stages Inc. stock received by Carl in the incorporation is zero.</em>"><br/>
                                        <input type="radio" name="topic_t[6]" value="3" {if condition='isset($log.6) && $log.6.topic_v eq 3'}checked{/if} title="<em class='span'>The adjusted basis to Carl of Stages Inc. stock received by Carl in the incorporation is $300,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[6]" value="4" {if condition='isset($log.6) && $log.6.topic_v eq 4'}checked{/if} title="<em class='span'>The adjusted basis to Carl of Stages Inc. stock received by Carl in the incorporation is $600,000.</em>"><br/>
                                        <input type="radio" name="topic_t[6]" value="5" {if condition='isset($log.6) && $log.6.topic_v eq 5'}checked{/if} title="<em class='span'>The adjusted basis to Carl of Stages Inc. stock received by Carl in the incorporation cannot be determined.</em>"><br/>
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                        </form> This is the adjusted basis of the property Carl contributed.</li>
                    <li><span class="parent mbg far {if condition='isset($log.7)'}xbg{/if}">The adjusted basis to Stages Inc. of the property received from Morgan is $400,000.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
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                                        <input type="radio" name="topic_t[7]" value="1" {if condition='isset($log.7) && $log.7.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The adjusted basis to Stages Inc. of the property received from Morgan is $400,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[7]" value="2" {if condition='isset($log.7) && $log.7.topic_v eq 2'}checked{/if} title="<em class='span'>Adjusted basis to Stages Inc. of property received from Morgan is zero.</em>"><br/>
                                        <input type="radio" name="topic_t[7]" value="3" {if condition='isset($log.7) && $log.7.topic_v eq 3'}checked{/if} title="<em class='span'>Adjusted basis to Stages Inc. of property received from Morgan is $150,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[7]" value="4" {if condition='isset($log.7) && $log.7.topic_v eq 4'}checked{/if} title="<em class='span'>Adjusted basis to Stages Inc. of property received from Morgan is $250,000.</em>"><br/>
                                        <input type="radio" name="topic_t[7]" value="5" {if condition='isset($log.7) && $log.7.topic_v eq 5'}checked{/if} title="<em class='span'>Adjusted basis to Stages Inc. of property received from Morgan cannot be determined.</em>"><br/>
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                        </form> This is the fair value of the land received from Morgan.</li>
                    <li><span class="parent mbg far {if condition='isset($log.8)'}xbg{/if}">The adjusted basis to Stages Inc. of property received from Carl is $150,000.</span>
                        <form class="layui-form" id='form' action="{:url('index/form')}" method="post" style="display:none;">
                            <blockquote class="layui-elem-quote layui-quote-nm">
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                                        <input type="radio" name="topic_t[8]" value="1" {if condition='isset($log.8) && $log.8.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The adjusted basis to Stages Inc. of property received from Carl is $150,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[8]" value="2" {if condition='isset($log.8) && $log.8.topic_v eq 2'}checked{/if} title="<em class='span'>The adjusted basis to Stages Inc. of property received from Carl is zero.</em>"><br/>
                                        <input type="radio" name="topic_t[8]" value="3" {if condition='isset($log.8) && $log.8.topic_v eq 3'}checked{/if} title="<em class='span'>The adjusted basis to Stages Inc. of property received from Carl is $300,000.</em>" ><br/>
                                        <input type="radio" name="topic_t[8]" value="4" {if condition='isset($log.8) && $log.8.topic_v eq 4'}checked{/if} title="<em class='span'>The adjusted basis to Stages Inc. of property received from Carl is $600,000.</em>"><br/>
                                        <input type="radio" name="topic_t[8]" value="5" {if condition='isset($log.8) && $log.8.topic_v eq 5'}checked{/if} title="<em class='span'>The adjusted basis to Stages Inc. of property received from Carl cannot be determined.</em>"><br/>
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                        </form> This is Carl's adjusted basis in the property.</li>
                </ol>
                &nbsp;<br>
                Sincerely,<br>
                &nbsp;<br>
                Howard Blair<br>
                Senior Tax Consultant<br>
                &nbsp;
                <hr>
                <p>&nbsp;</p>

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                <div><strong>Pop-up 1</strong><br>
                    <span style="color:#0000ff">Taxable income (loss) recognized by Larry</span><br>
                    The correct amount to be reported as taxable income (loss) by Larry is $100,000. This represents the fair value of the services contributed to Stages Inc., in return for stock in Stages Inc. The contribution of services to a corporation in exchange for the corporation's stock is fully taxable to the service provider at the fair value of the services rendered.<br>
                    &nbsp;<br>
                    <strong>Pop-up 2</strong><br>
                    <span style="color:#0000ff">Taxable income (loss) recognized by Morgan</span><br>
                    The correct amount to be reported as taxable income (loss) by Morgan is zero. Whenever a group of shareholders (a control group) together own more than 80 percent of the stock of a corporation, no gain or loss is generally recognized by those shareholders who contribute property to the corporation. (Exceptions do apply&mdash;see the explanation for the amount of taxable income recognized by Carl as a result of Carl's contribution of property, below.)<br>
                    &nbsp;<br>
                    <strong>Pop-up 3</strong><br>
                    <span style="color:#0000ff">Taxable income (loss) recognized by Carl</span><br>
                    The correct amount to be reported as taxable income (loss) by Carl is $150,000. Generally, whenever a group of shareholders (a control group) together own more than 80 percent of the stock of a corporation, no gain or loss is recognized by those shareholders who contribute property to the corporation. However, an exception arises when a liability of the shareholder is assumed by the corporation, and that liability exceeds the adjusted basis of the property contributed to the corporation by that shareholder. In that case, the shareholder must recognize gain to the extent that the liability exceeds the shareholder's adjusted basis in the property. Because Stages Inc. assumed a liability of $300,000 from Carl and Carl's adjusted basis in the property contributed to Stages Inc. was $150,000, the $150,000 differential ($300,000 liability less the $150,000 basis) is taxable income to Carl.<br>
                    &nbsp;<br>
                    <strong>Pop-up 4</strong><br>
                    <span style="color:#0000ff">Adjusted basis to Larry of Stages Inc. stock received by Larry in the incorporation</span><br>
                    The correct adjusted basis to Larry of the Stages Inc. stock received by Larry in the incorporation is $300,000. This represents the total of the $100,000 fair value of services rendered by Larry to Stages Inc. plus the $200,000 of cash contributed by Larry to Stages Inc. Note that because the services rendered by Larry were fully taxable, the adjusted basis in the stock received in exchange for those services includes the full fair value of those services.<br>
                    &nbsp;<br>
                    <strong>Pop-up 5</strong><br>
                    <span style="color:#0000ff">Adjusted basis to Morgan of Stages Inc. stock received by Morgan in the incorporation</span><br>
                    The correct adjusted basis to Morgan of the Stages Inc. stock received by Morgan in the incorporation is $250,000. Although Morgan was not currently taxed on the excess of the fair value of the property of $400,000 over its adjusted basis to Morgan of $250,000, Morgan's adjusted basis in the stock received in exchange is the adjusted basis of the property contributed of $250,000 and not its fair value of $400,000.<br>
                    &nbsp;<br>
                    <strong>Pop-up 6</strong><br>
                    <span style="color:#0000ff">Adjusted basis to Carl of Stages Inc. stock received by Carl in the incorporation</span><br>
                    The correct adjusted basis to Carl of the Stages Inc. stock received by Carl in the incorporation is zero. Generally, the adjusted basis of stock received by a shareholder in exchange for property contributed to a corporation is the same as the adjusted basis of the property exchanged. However, that adjusted basis is reduced by the amount of any liabilities of the contributing shareholder assumed by the corporation and is increased by the amount of gain recognized by the shareholder as a result of the incorporation. Therefore, Carl's adjusted basis in the stock received is equal to the $150,000 adjusted basis of the property he contributed, less the $300,000 of Carl's liabilities assumed by Stages Inc., plus the $150,000 gain recognized by Carl on the incorporation. $150,000 less $300,000 plus $150,000 equals an adjusted basis to Carl in the Stages Inc. stock received of zero. &nbsp;<br>
                    &nbsp;<br>
                    <strong>Pop-up 7</strong><br>
                    <span style="color:#0000ff">Adjusted basis to Stages Inc. of property received from Morgan</span><br>
                    The correct adjusted basis to Stages Inc. of the property received from Morgan is Morgan's adjusted basis in the property, or $250,000.<br>
                    &nbsp;<br>
                    <strong>Pop-up 8</strong><br>
                    <span style="color:#0000ff">Adjusted basis to Stages Inc. of property received from Carl</span><br>
                    The correct adjusted basis to Stages Inc. of the property received from Carl is $300,000. This is the greater of:<br>
                    &nbsp;
                    <ul style="margin-left:40px">
                        <li>Carl's adjusted basis in the property of $150,000 plus the $150,000 gain recognized by Carl (a total of $300,000); or</li>
                        <li>the liabilities of Carl assumed by Stages Inc. (also $300,000).</li>
                    </ul>
                    &nbsp;<br>
                    Thus, the correct adjusted basis to Stages Inc. of the property received from Carl is $300,000.
                </div>
            </div>
        </div>
    </div>
</div>

